Bubble or No Bubble?
The last seven years have seen a surge in the metro Denver real estate market as record
numbers of buyers look for homes, which in turn has caused prices
to jump. The strength in the market has been so
pronounced that people are beginning to ask whether we’re
setting ourselves up for another bubble.
Good question. While no one can ever predict the future with certainty,
I see no evidence that we’re heading for a dramatic downturn in the real estate market any time soon.
Here’s why:
1.
Even with the continued increase in metro Denver home prices (up another 8 percent in the
past 12 months) the average inflation adjusted PITI (Principle, Interest, Taxes, and Insurance)
payment made in metro Denver is actually BELOW our 35-year average. This means that
whileprices have steadily risen, buyers are still able to afford their monthly payments, providing
plenty of room for continued home price increases.
2.
The number of transactions relative to the population of metro Denver is
just about at the 25-year average.
At the peak of the bubble in 2006 the number of home sales was about 20 percent
above the historical average. When we see the number of closed transactions well above our
historical average that’s an indication of an overheated market, as it was in 2006.
The number of closed home sales is actually DOWN 12 percent in the past year due to the low inventory. No
sign of a bubble here.
3.
In 2006, many of the deals were closed with low or no documentation
mortgages (“liar loans or no doc loans”). Today, mortgage underwriting standards are among the toughest they’ve been
in decades. This prevents unqualified buyers from purchasing property, which mitigates the
chance of the market overheating (fewer buyers means fewer purchases means less chance of
the market frothing into bubble territory like it did in the past).
4.
Because of relatively high home affordability it’
s a lot cheaper to buy than rent in our market.
This would not be true in a bubble. For housing price affordability to return to the average level
that we saw in the years between 2000 and 2004 either home prices would have to increase an
additional 35 percent or interest rates rise to 6.6 percent. Neither is going to happen any time
soon.
5.
The imbalance between buyers and sellers we’ve seen recently in our housing market (too many
buyers/not enough homes for sale) is due to a lack of inventory, not
illogical/unrealistic/unsustainable demand from buyers. “Much of the price increases we are
seeing are the result of rising demand among investors and homebuyers for a still-limited supply
of homes for sale,” said Anand Nallathambi, president and CEO of CoreLogic. This imbalance is a
logical correction from years past when we had too FEW buyers in the market. This is how
markets are supposed to work,always regressing to the mean over time.
6.
Rising mortgage rates will help to temper the possibility of a bubble as
well (they are still near 50-year lows but are expected to rise someday).
“History shows that a rapid rise in interest rates
tends to have little correlation with home prices. Rather, rising rates are more likely to
contribute to a decrease in home purchase volume,” wrote Mark Palim in a Fannie Mae
commentary. So the positive side of a rise in mortgage rates is that it will
reduce the number of buyers and therefore lower the chance the market will rise out of control and
end up collapsing in a bubble.
As you see from our monthly market snapshot, the inventory of metro Denver h
omes for sale continues to fall; it’s down another 5 percent from a year ago.
Since the inventory is still extremely low (about 5,520 homes on the market where
about 18,000 is a balanced market) I am all but certain
the demand will still exceed the supply for the next several years and prices will con
tinue to rise for the foreseeable uture. No bubble on the horizon yet.
Stay tuned!
Real Estate News
Five Essential Things You Need To Know About the 20
16 Summer Home Buying Market
This year has kicked off with an array of experts trumpeting the Denver housing
market’s strength and resilience. Inventory is at record lows, home prices continue to rise, and foreclosure
activity has ebbed to lows not seen since before the 2007 downturn. Spring and summer is the time for selling houses.
The months of April, May, June, and July typically account for more than 40 percent of all housing transactions annually,
thanks in large part to good weather.
1.
Inventory shortages: The number of available homes in metro Denver has plunged to record lows, thanks to
both an abnormally small supply of existing homes for sale and a dearthof new construction not keeping pace with
the current demand. Today there are only about 5,000 properties on the market. During the downturn there were
over 30,000 on the market! The tight inventory makes it a great time to sell a home and a challenging time to be a
buyer. With my experience and expertise I can help you with either. Call me and let me show you how.
2.
Increased Competition : In addition to a dwindling supply of available homes, the number of buyers has surged.
And not just traditional buyers – investors have comprised a sizeable chunk of the buyer pool since the downturn
and continue to do so. Real estate investors are responsible for about 25 percent of the existing home sales each month.
It’s not uncommon these days to see streams of buyers along with their agents walking into homes as we
are showing property. You, the prospective buyer, need to be prepared to move fast if you find a
property you’d like to buy. “Buyers need to be patient because many will be outbid by others and might have to bid on
multiple homes,” cautions Jed Kolko, chief economist of Trulia. Yes, indeed.
3.
Cash is Still King: Given the steep competition, all-cash buyers who can close a deal relatively quickly offer great
incentive to sellers. “Cash will still be king if there are multiple bids because from a seller’s view, they want a deal
with fewer hiccups, “says Lawrence Yun, chief economist at the National Association of Realtors. My sellers are
surprised to hear that about 30 percent of home sales each month are all-cash purchases. For the 70 percent of
buyers who purchase with loans, strong lender letters issued by excellent loan officers are critical.
4.
The Good News: Lending Tree chief executive Doug Leboda says in light of the recently unveiled new home-
lending standards, lenders are slowly starting to make it slightly easier to get approved. Talk to a couple of lenders,
they’ll tell you things have improved over the past few years on the loan front. Take the time to find a great lender,
it’ll make a big difference in your ability to purchase a property.
5.
More Good News: We are seeing a definite correction in the appraisal business. A few years ago appraisers
were consistently under-valuing properties, reacting to the over-conservative nature of their shell-shocked
underwriter patrons. Today we are seeing the vast majority of appraisals coming in at value, killing far fewer deals
than in the past.
